Good Governance and Competitiveness

Enlightened business leaders recognize that strict environmental regulations effectively enforced can increase their competitive edge. A globalizing economy requires more effective governance structures at the international level to make corporate social and environmental responsibility competitive.

Business and environment

The first encounters between business and environmental interests in the 1960s and 1970s were negative. Industrial pollution had caused great damage, and the costs of pollution control and clean-up were considerable. Governments instituted increasing levels of environmental regulation in the public interest against the strong opposition of the business community. This resulted in the general assumption that environmental regulations reduce profits and damage competitiveness.

Today that assumption persists, particularly in government. Many governments continue to believe that, to stimulate the economy and create wealth, government regulation and interference with business should be minimized or eliminated.

But the reality is different. One of the surprising results of the 2004 Executive Opinion Survey of the World Economic Forum, representing the considered opinions of 8,729 business leaders in 104 countries (Blanke and Loades, 2004), was the demonstration that business leaders considered good governance, as expressed in strict environmental regulation fairly enforced, actually increased their competitiveness (Dahl, 2004). The countries where business thinking on environmental and social responsibility is most advanced are also those with some of the most advanced and competitive industrial economies. Having strong regulations allows companies to compete in meeting their regulatory obligations, giving a competitive advantage to companies that innovate and increase their efficiency in environmental performance, as well as opening up new market niches for environmental services.

Importance of good governance

Having good laws and regulations is not enough. Countries where the laws are inefficiently or irregularly enforced and businesses can escape from their responsibilities put companies that want to advance in this area at a competitive disadvantage, and this rebounds in the longer term on their international competitiveness as well. Good governance is essential.

The quality of governance, the trust and collaborative spirit established between business and government, and the confidence in business that their taxes will be spent effectively in their common interest, are critically important features of the countries that are most competitive at the international level.

Table 1 (from Dahl, 2004) ranks country performance in environmental and social responsibility as judged by business leaders. This is not a ranking of environmental quality, but of the efforts of both business and government to address and resolve their environmental problems in the context of sustainable development.

The strong correlation between economic and environmental performance shows both that increasing wealth helps to fund environmental measures, but also that high environmental performance and economic competitiveness go together rather than conflicting. Countries that have been politically averse to environmental controls in order to favour the business sector are relatively less competitive than those that give environmental protection and sustainable development a high priority. The poor performers in Europe like Greece and Italy rank far below many developing countries.

(from Dahl, 2004)

The challenge from globalization

While the link of environmental responsibility and competitiveness is clear at the national level, it is more complex from the global perspective of sustainable planetary development. In a rapidly globalizing world economy, global competitiveness is rapidly becoming more important than national competitiveness, and in the present unregulated global system, there are strong pressures to lower environmental and social standards. Global sustainability requires good governance at the international level as well to achieve the same effect as effective regulation at the national level.

Global environmental problems like climate change, stratospheric ozone depletion, biodiversity loss, natural resource depletion and management of toxic chemicals and wastes, require global environmental regulations to establish a level playing field for global competition (Dahl, 2002). Harmonization of social regulations would also reduce the pressures for delocalizations with their associated social and economic costs. Yet the mechanisms of governance created for at least some of these problems are cumbersome, voluntary and under-resourced.

Another challenge to global sustainability is the international distribution of wealth. No society can continue for long with increasing disparities between the richest and the poorest; this is socially and morally unsustainable. Without mechanisms of global governance to address this problem, the symptoms of social stress such as failed governments, illegal immigration and terrorism will increase. Yet with globalization, multinational corporations and private fortunes can more easily escape from national taxation, which is the major existing mechanism for wealth redistribution (Dahl, 1996).

Poverty reduction is high on the international agenda, with targets such as the Millennium Development Goals, but the efforts to go beyond words to actions is falling far short of the needs. There is increasing recognition that some international mechanisms for taxation will be necessary to pay for the costs of global services and governance mechanisms and to moderate the extremes between nations that are destabilizing the world social, economic and environmental systems. The private sector should support efforts to strengthen international mechanisms that will improve their ability to compete fairly in global markets.

Only more effective global governance will make corporate social and environmental responsibility competitive at the international level, and thus create a virtuous circle of development towards sustainability.

References:

Blanke, Jennifer, and Emma Loades (2004). "Capturing the state of country competitiveness with the Executive Opinion Survey", p. 199-208. In Michael E. Porter, Klaus Schwab, Xavier Sala-i-Martin and Augusto Lopez-Claros, The Global Competitiveness Report 2004-2005. World Economic Forum. Houndsmill, UK and New York: Palgrave Macmillan.

Dahl, Arthur Lyon (1996). The ECO Principle: Ecology and Economics in Symbiosis. London: Zed Books Ltd, and Oxford: George Ronald.

Dahl, Arthur Lyon (2002). The challenge of sustainable development and prosperity. Paris, European Baha'i Business Forum.

Dahl, Arthur Lyon (2004). "The competitive edge in environmental responsibility", p. 103-110. In Michael E. Porter, Klaus Schwab, Xavier Sala-i-Martin and Augusto Lopez-Claros, The Global Competitiveness Report 2004-2005. World Economic Forum. Houndsmill, UK and New York: Palgrave Macmillan.